February 2010 Archives

Like most of the country, southern California has been left reeling in the wake of mulitple economic blows. Cities like San Diego continue to struggle with massive budget deficits and many citizens are barely staying afloat.

Between 2008 and 2009, the number of Californians filing for bankruptcy skyrocketed, climbing nearly 37 percent. Out of all mortgage owners in California, a whopping 35 percent are underwater. In fact, things are so bad that Obama recently announced plans to help bail out homeowners at risk of foreclosure.

Still, for all of this, things appear to be looking up - according to analysts from the Kyser Center for Economic Research.

San Diego Mayor Jerry Sanders has repeatedly dismissed bankruptcy as a foolish and futile solution to the city's financial agony. On January 31, the mayor submitted a strongly-worded opinion piece to the San Diego Union Tribune, calling the proposed bankruptcy solution a "myth" and "sham."

In recent months, business leaders and government officials have both cited bankruptcy as a possible solution for San Diego's ailing budget, fueled, for the most part, by its massive pension debt.

However, Sanders contends that filing for bankruptcy is not a viable solution to the pension problem and that, at best, would waste millions of dollars and valuable time. In a recent article, the Union Tribune took a look at this claim and found that it was mostly true ... but not completely.

In 2009, 205,705 Californians declared bankruptcy. This was up 37 percent from 2008 and 66 percent from 2007, when the first inklings of a troubled economy began to trickle in.

Today, California has a 12.1 percent unemployment rate - nearly two percent higher than the national average - and thousands of homeowners are faced with mortgages that are underwater. In fact, California is one of five states in which average home prices have dropped more than 20 percent.

In a plan to help struggling homeowners stay in their homes, President Obama has announced a $1.5 billion fund to provide additional support to the hardest hit states, like California.

Next Monday, February 22, the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 goes into effect, severely restricting the ability of banks and credit companies to unfairly charge consumers.

In a country where the bankruptcy rate soared more than 30 percent last year, this could be a huge boon to the general public - as well as a sharp thorn in the side of creditors.

Signed into law last May by President Obama, the main goal of the CARD Act is to ensure credit availability for financially-strained consumers. At the same time, the government hopes it will make credit card terms less complicated, billing fairer and put a stop to unfair rate increases and questionable charges.

San Diego bankruptcy attorneys might just have to stay put a while longer. Although recently released data shows most San Diego area home prices on the rise from last year, the backlog in San Diego foreclosures might still leave lingering effects on San Diego's economy and might even increase Chapter 13 bankruptcy filings.

The highest price-per-square foot increase on sold homes in the San Diego area was in Point Loma, where price-per-square foot increased 45 percent. Of course, only three houses were sold in Point Loma in 2009 and eleven houses in 2008. LaJolla saw a huge drop in price-per-square-foot with a price decrease of 24 percent from 2008. 

We've discussed the idea of municipal bankruptcy under Chapter 9 of the Bankruptcy Code but we never mentioned the concept of states declaring bankruptcy. 

Well, that's because states can't declare bankruptcy.  But the former CEO of one of the world's largest companies seemed confused about that fact.

Carly Fiorina, former CEO of Hewlett Packard and US Senate hopeful, made the comments Monday during a round-table discussion with business leaders at a cement plant in the Inland Empire community of Colton. 

We've discussed the concept of municipal bankruptcy in several earlier posts.  Chapter 9 of the Bankruptcy Code applies to such bankruptcies and provides that an eligible "municipality" is a "political subdivision or public agency or instrumentality of a State."

Foreclosure just got a bit easier for holders of Citibank loans.  Citbank is launching a new pilot program today which will allow distressed homeowners to stay in their home up to six months, if they agree to hand over the deed to the lender.  In order to be eligible  for this new pilot program, homeowners must have their first mortgages with CitiMortgage, no secondary mortgage, actually live in the home and be at least 90 days late on their mortgage payments.

This type of foreclosure is not uncommon to San Diego bankruptcy attorneys.  The "deed in lieu of foreclosure" is considered a foreclosure alternative but is essentially the same thing as a foreclosure, in many regards. 

Is the prospect of bankruptcy reform dead?  Will bankruptcy judges ever be given the power to help the masses of distressed homeowners lining their courtrooms? 

President Barack Obama promised the introduction of Main-Street-centered legislation intended to help distressed homeowners.  But it seems as though every time President Obama has a brilliant plan, the bank lobby groups refute with their own brilliant plans.

And their brilliant plans often involve large dollar figures and extreme lobbying- all directed at the legislators.

Last May, the Senate blocked a piece of legislation that many San Diego bankruptcy attorneys were anticipating. As one Senator said:

 "The banks--hard to believe in a time when we're facing a banking crisis that many of the banks created--are still the most powerful lobby on Capitol Hill. And they frankly own the place."

How easy is credit repair after a Chapter 7 or Chapter 13 bankruptcy?

Most San Diego bankruptcy attorneys would tell you that rebuilding credit is not as hard as it seems.

Think about it in the following scenario: You have a large debt and your payments are consistently missed or late. This would be incredibly damaging to your credit. 

Now, assume the debt is wiped away clean after a Chapter 7 or Chapter 13 bankruptcy. If you can be diligent about your credit repair, you might be able to start fresh, says the Lansing State Journal. 

In an earlier post, we looked at the recent bankruptcy announcement by liberal talk-radio station, Air America.  The station, Air America, is essentially the liberal rival to the more conservative talk radio stations.  It announced, last month, that it plans to file for Chapter 7 bankruptcy.  Now, we are beginning to see the aftermath of their declaration to file bankruptcy, as we learn that some of Air America's creditors are the very names that have become synonymous with the soon defunct talk-radio station.

Apparently, this wasn't the first time that radio station Air America declared bankruptcy.  In 2006, the company declared a Chapter 11 bankruptcy under the name "Piquant LLC".  The Chapter 11 bankruptcy was a reorganization attempt by the company management in 2006.  Subsequently, due to dwindling advertising revenues, the station closed its doors last month. 

Among Air America's creditors include the very people that gave Air America prominence-- Rachel Maddow and Ronald Reagan Jr.  According to the Chapter 7 bankruptcy petition, the station currently owes Maddow $3,952 for her services and owes Reagan $6,351.  The chapter 7 bankruptcy petition lists assets of $1.5 million and debt of $17.2 million.  

Economic stress levels were at all time high last December, signaling rising bankruptcy, insolvency and foreclosure.  This peak in economic stress was largely due to the economic strain on the Western states, fueled by financial woes in areas such as San Diego, the Bay Area and Los Angeles.

The Associated Press's Stress Index rates stress levels between 1 and 100, taking into factors such as a county's unemployment, foreclosure and bankruptcy rates.  A county is generally considered to be under stress when its score is greater than 11. 

According to the AP Stress Index, nearly 45 percent of counties within the United States were considered "stressed" in December, with Nevada leading the pack in bankruptcy and insolvency rates. 

Unlike many of the other states, however, California saw its stress level go down from November to December. California had a December stress level of 16.25. 

Bankruptcy rates for the second half of 2009 had grown fastest in Nevada, Arizona and California. San Diego bankruptcy attorneys place the blame on the housing market, especially as they see a trend of higher-income earners now coming in to file for Chapter 13 bankruptcy.

Reality television doesn't pay as well as one would imagine.

Well, at least that's what Lynn Curtin says. Curtin, 51, is a reality star on the "Real Housewives of Orange County," a Bravo reality show that depicts the lives of suburban housewives. 

Says Curtin, "Most people think we get $100,000 an episode -- that's not us. I wish it was."

Indeed, Curtin and her husband face debt in the millions, including a $1.26 million court judgment from a real-estate development dispute, their bankruptcy attorney said earlier last month. 

The Curtins' financial problems make for good reality television and have been part of the television show. They have suffered four evictions since 2007 and their financial troubles are heavily rooted in the slowdown of the economy and incidentally, the slowdown in Frank Curtin's construction business.  

San Diego bankruptcy attorneys are seeing similar activity throughout the county, as seemingly wealthier individuals are now rushing to the bankruptcy courts in search of bankruptcy protection. 

Bargain-hunting fashionistas may not be losing a popular shopping destination after all, despite the fact that the company had declared Chapter 11 bankruptcy in Delaware earlier last year.  Filene's Basement filed for Chapter 11 last year in a Delaware bankruptcy court.  Now, FB Liquidating Estate, the bankrupt company previously known as Filene's Basement, had its bankruptcy plan approved by a bankruptcy court earlier this month. 

The plan approved a liquidation of Filene's, where Filene's would pay unsecured creditors approximately 75 cents to the dollar from sale of its assets last June to an affiliate of Syms Corp. (Nasdaq: SYMS). 

Filene's Basement filed for Chapter 11 bankruptcy on May 4, 2009.  Since then, the Syms affiliate took over  almost all of Filene's assets on June 18, 2009. 

San Diego bankruptcy attorneys are seeing a huge rise in the number of bankruptcies, according to the Associated Press. According to the article, bankruptcy attorneys in several hard-hit regions have been shifting their caseloads to accommodate for the increase in bankruptcies. 

Of the hard hit regions, Arizona saw the fastest increase in bankruptcies in 2009. Arizona's bankruptcy rate jumped 77 percent from the previous year. Wyoming followed at 60 percent, then Nevada at 59 percent.  

California wasn't lagging too far behind last year, either, with an increase of 58 percent from the previous year. nationwide, bankruptcies increased 32 percent from 2008. 

Bankruptcy attorneys in Arizona, as well as San Diego bankruptcy attorneys are feeling the crunch.  

"Bankruptcy is swallowing up the whole practice," says one bankruptcy attorney, "There's little time to do other stuff."

San Diego bankruptcy attorneys and real estate professionals are seeing no slowdown in the default and foreclosure rate of multi-million dollar homes.  San Diego based MDA Dataquick reported 2,689 foreclosures and 4,925 default notices in the million-dollar-plus homes last year.

Yes, even the multi-millionaires are feeling the real-estate crunch. Says an Oakland luxury realty specialist: "In the same way you don't see many new Porsches driving around anymore, we don't market homes as trophy properties anymore.  We sell them as large homes, comfortable estates -- it's a repositioning in marketing. Bragging rights are not as popular today as they were in 2005."

This is just more evidence that while the economy is picking up, it is picking up due to the availability of the cheaper foreclosed homes, a huge plus in the newfound culture of frugality -- the culture of insolvency avoidance.  Thus, it's essentially a bottom-up recovery and not a recovery from the top-down. 

A discharge in bankruptcy is supposed to free up the debtor from any debt. But contrary to what most believe, you can't wipe out all your debts in bankruptcy.  

Also, if the IRS had already recorded a tax lien on your property before you filed for bankruptcy, you might still have to pay off that lien one day. 

Trust fund taxes, also known as the withholding taxes, are not dischageable in bankruptcy.

Here's the good news, though. Income taxes can be discharged in Chapter 7 bankruptcy, some of the time.  The following conditions need to be met, however: 

• There was no fraud involved in the tax liability;
• It has been at least three years since the due date (or filing date, whichever was later) of the income tax return which gave rise to the liabilities;
• The liability arose from a filed tax return, which was filed least two years prior to filing for bankruptcy.
• The income tax liability must have been assessed at least 240 days before the bankruptcy petition is filed in court.

Many underwater San Diego homeowners are simply walking away from their mortgages, rather than risk insolvency at the hands of high housing costs.  

Is walking away really the solution to San Diego's housing and bankruptcy woes? 

Remember the days when homes were worth more than you bought them for?  The days when you could rely on that huge equity in your house and ask the bank for a HELOC loan? 

Those days are forlorn.  Home equity is becoming something we only speak about in tales of the past.  In the past year, home values dropped. For many homeowners, the values dropped to well below their purchase price.   

Shifting consumer preferences strike again.  This time, it's the movie rental industry that is feeling the blow.  Movie Gallery, the owner of the Hollywood Video rental stores has officially filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. 

Movie Gallery operates the second-largest video rental chain in North America, the first being Blockbuster Inc (BBI).  Blockbuster, too, has been suffering greatly in the advent of newer, more efficient movie-rental companies.

In fact, the efficiency and cost-effectiveness of some of Movie Gallery's and Blockbuster's competitors could be the driving force behind the demise of these movie giants

It's 2010 already, over two years since the housing crisis began, and housing prices are not climbing as optimistically as one would have hoped.  In fact, December reported the largest monthly drop of previously occupied home sales in more than 40 years.  San Diego, however, appears to be in better shape than the rest of the nation. 

December sales fell 16.7 percent  across the nation.  This was in part due to the fact that President Obama's first-time homebuyer's credit was set to expire on November 30, 2009.  The tax credit has been extended to homes purchased by April 30, 2010, and has been expanded beyond first-time home buyers to include long-term homeowners as well .  Despite the extension and expansion of the credit, the drop in sales after the sunset of the previous credit raises the question of the sustainability of the housing market after April 30. 

After all, if housing sales declined at the sunset of the previous tax credit initiative, whose to say that the same won't happen after the new sunset date?

The San Diego Tribune reported last week that the economy is growing at a rate of 5.7 percent, faster than expected.  This number is based on year-end data and is said to have been the fastest rate of growth since 2003. 

Despite the rise in the economic growth rate, San Diego-area unemployment is still in the double-digits, sitting at 10.3 percent.

President Barack Obama proposed new tax credits aimed at the small business.  These tax credits are offered with the aim of encouraging hiring by small businesses. 

The link between unemployment and bankruptcy is as undeniable as the link between the weak housing market and bankruptcy. It's a direct link. People who lose their source of income are less likely to be able to meet their debt obligations. Similarly, people with high debt obligations and dwindling home equity have a tougher time making ends meet. 

What do car ownership and insolvency have in common? 

Apparently, they both have a correlation with mortgage foreclosure rates within a given neighborhood. A recent study conducted by the Natural Resources Defense Council shows a direct relationship with these two factors, namely, transportation costs and mortgage foreclosures. Interestingly, the study shows that debt-to-income ratio and credit scores are not the sole deciding factors in predicting foreclosure rates within a particular demographic. 

In essence, the higher the transportation costs in a city, the higher the rate of foreclosure.  In fact, the study mentions the real cost of housing to be a combination of transportation costs as well as mortgage costs.

Americans saw the number of personal bankruptcies rise sharply in 2009.  In fact, bankruptcies rose by nearly one-third in 2009. 

Could this rise be due to the job market or is it a proximate result of the weak housing market?  The San Diego housing market supposedly bottomed out last spring 

President Barack Obama called for a new jobs bill last week in his State of the Union address.  In his address, he stated that the government can create the necessary conditions to expand and create new jobs.  He proposed that the government would take $30 million dollars from the money taken from large banks and invest it in smaller community banks, which banks would in turn lend to small, local businesses. 

Are these initiatives the solution to the rise in consumer bankruptcies?

The Wall Street Journal reported that more people are filing Chapter 7 bankruptcies in recent times, as opposed to Chapter 13 bankruptcies. The key difference is that the Chapter 7 bankruptcies liquidate the assets to pay off creditors whereas the Chapter 13 bankruptcies are reorganizational, proposing a repayment plan to creditors.  

A popular theater just north of San Diego has filed for bankruptcy.  The upscale Cinema Fusion in Anaheim filed for Chapter 11earlier this month.  The theater operates in The Shops at Anaheim GardenWalk, a struggling shopping center just a few miles from Disneyland. 

The shopping mall has been struggling since its inception in 2008 and  has been in default of its loan obligations since September.  San Diego based Excel Realty Holdings, the mall's developer, is currently working with its attorneys to negotiate the debt on certain loans with its lender, Citigroup Inc. 

The theater lists its debts between $1 million and $10 million in its bankruptcy filing and several of its creditors are unsecured, which may make it difficult for them to enforce their rights.  In bankruptcy, unsecured creditors are usually the ones who are least likely to collect, as they fall lowest in the priority chain.